Big Four accountancy firms 'too close to company bosses'

The Competition Commission's report on how KPMG, PwC, Ernst & Young and Deloitte audit 90% of businesses is due

PriceWaterhouseCooper's building in London Bridge. The report is expected to attack the cosy relationship between auditors and senior management at City firms. Photograph: Garry Weaser for the Guardian Garry Weaser/Guardian

The bosses of Britain's largest companies are too close to the "Big Four" accountancy firms which carry out the overwhelming majority of audits, a report is expected to say on Friday.

The Competition Commission's review into how KPMG, PwC, Ernst & Young and Deloitte audit 90% of UK-listed blue chip businesses is expected to say that while it found no evidence of collusion between them, there is a restricted amount of competition.

It is expected to attack the cosy relationship between auditors and senior management at City firms, who are often alumni of the Big Four themselves.

High-ranking members of Big Four firms also sit on many company boards.

It will reportedly not seek the break up of these firms – which also provide a wide range of non-audit services to their clients – but suggest measures to reduce their stranglehold over the UK's largest firms, including a ban on "Big Four-only" clauses in loan documents from banks and giving shareholders a greater say in the choice of auditors.

Firms could also be ordered to rotate between auditors and invite other firms to tender for work on their accounts.

The investigation, ordered in 2011, was partly prompted by a House of Lords inquiry which found that listed companies, which must have their annual reports signed off by an auditor, use the same accountant for an average of 48 years, a figure the Big Four dispute.

The fear is that auditors become less sceptical over time about what clients tell them.

There was also anger that accountants gave banks a clean bill of health just before taxpayers had to rescue them during the financial crisis.

The inquiry has looked at issues such as the gap between the big four and mid-tier firms, barriers to entry and expansion for smaller firms, and cites the case of Arthur Andersen, which collapsed after it was implicated in the Enron scandal, as showing that size does not guarantee stability.

The Big Four's audit and advisory income easily outstrips their rivals. In the financial year ended 2011, the audit income for the four largest firms ranged from £403m to £893m, compared with £133m for the largest mid-tier company. The Big Four have insisted competition is strong, pointing to downward pressure on fees.

"When reaching its provisional findings, the Competition Commission should recognise that the large company audit market currently produces competitive outcomes for large companies and investors," PwC said.

The European Union's has drafted a law which proposes mandatory switching or rotation of auditors every six years and even a market share cap. The US audit watchdog has also aired plans for auditor rotation.